Posted in: FINRA | Greedy Brokers | Risky Investments | Lehman Notes |
A FINRA arbitration panel awarded a small investor $200,000 last week after a UBS broker was judged to have inappropriately sold her Lehman Brothers principal protected notes.
What is remarkable about this case is that there are hundreds, if not thousands of other pending FINRA customer complaints involving similar Lehman Brothers principal protected notes, according to the Wall Street Journal. This case is one of the first cases involving Lehman structured notes to be heard by FINRA, and future plaintiffs will surely cite this decision.
First, it is important to note that since FINRA is not a government agency, and FINRA arbitrations are not a court of law. Future arbitrators will be allowed to decide in either way regardless of this decision. But it is reasonable to assume that different arbitrators, in future cases involving Lehman notes, will concur with this latest decision when shown similar evidence of broker misrepresentation.
Principal protected notes are aptly named because they generally include a guarantee from brokers that the investor will have a return equal to the original investment. What isn’t advertised is that many of these notes come with hidden costs or restrictions, or suffer so much from market conditions as to not deliver on the initial promise.
After the collapse of Lehman Brothers in September 2008, an estimated $1.84 million worth of Lehman principal protection notes became nearly worthless.
The collapse of Lehman Brothers was the largest bankruptcy in United States history, after the firm had lost a collected $639 billion in assets. To put that in perspective, the next-largest bankruptcy was that of WorldCom in July 2002, a firm that lost $104 billion. Many customers who lost money on Lehman notes have alleged that UBS never made them aware of Lehman’s poor financial state.
With regards to the FINRA arbitrators’ latest ruling, a UBS spokesman blamed the clients’ losses on the failure of Lehman Brothers, and the market as a whole.
This, of course, ignores the fact that a UBS broker had solicited the principal-protected notes, and that UBS advertised them as being risk-free investments. Both UBS and the firm collected commissions as the result of the sales of these notes, and it was the customers the bulk of their money they had invested.
